Italy prepares €40 billion bank bailout using Brexit as the excuse
Barely has the market had time to digest last week’s Brexit vote by the UK, a vote which may never actually be implemented if the “sturm und drang” campaign unleashed by the EU and the ECB on UK capital markets succeeds in changing the mind of enough “Leavers” to the point that the entire referendum is called off and Boris Johnson never triggers the Article 50 clause, and already Europe’s most financially troubled nation, Italy, is using Brexit as a pretext to unleash a €40 billion ($44 billion) bailout of its insolvent banks.
As the WSJ reported earlier, the Italian government is considering a capital injection for the country’s banking system, after Italian lenders were hit by a sharp selloff in banking stocks Friday, triggered by Britain’s vote to leave the European Union. Of course, Brexit has nothing to do with it: instead, as everyone knows by now, Italy’s banks are beset with €360 billion (and rising) in bad loans, some 18% of total bank balance sheets, chronically poor profitability amid record-low interest rates, thin capital buffers and high costs. It was precisely these concerns that the recently created Atlante “bad bank” was supposed to address until it became painfully obvious that its total war chest of €4.25 was woefully inadequate to put even the smallest dent on Italian bank insolvency.
According to Ambrose Evans-Pritchard, the country is the first serious casualty of Brexit contagion and a reminder that the economic destinies of Britain and the rest of Europe are intimately entwined. Morgan Stanley warned in a new report that eurozone GDP would contract by almost as much as British GDP in a “high stress scenario”. “When Britain sneezes, Italy catches a cold. It is the weakest link in the European chain,” said Lorenzo Codogno, former director-general of the Italian treasury and now at LC Macro Advisors.
So, in the spirit of never letting a Brexit crisis go to waste, Italy has decided to use the British referendum as the scapegoat and demand nearly ten time as much in new capital to be used (and abused) as Italy’s banks see fit. As the Telegraph adds, an Italian government task force is watching events hour by hour, pledging all steps necessary to ensure the stability of the banks. “Italy will do everything necessary to reassure people,” said premier Matteo Renzi. “This is the moment of truth we have all been waiting for a long time. We just didn’t know it would be Brexit that set the elephant loose,” said a top Italian banker.
According to the WSJ, the chairman of Lower House’s Finance Commission, Maurizio Bernardo, confirmed that the government is studying options to support the banking sector, including a capital injection, and said a law decree “with measures going in that direction” could be approved by the end of this week. So far no decision has been taken as the government is monitoring how markets respond after Friday’s steep downturn.
They said how such an intervention would be implemented is unclear at this stage. it is also unclear how such a direct state recapitalization of Italian banks using public funds would be permitted by current EU and ECB regulations, which prohibit state bailouts of insolvent banks, although Europe has a long and illustrious history of finding massive loopholes to that particular prohibition. Last but not least it is unclear how existing stakeholders, shareholders, bondholders and uninsured depositors, would be impaired under such a bailout.
Italian officials are studying a direct state recapitalization of the banks, to be funded by a special bond issue, the Telegraph adds. They also want a moratorium of so-called ‘bail-in’ rules and bondholder write-downs, but these steps are impossible under EU laws. Mr Renzi raised the subject urgently at a meeting with German Chancellor Angela Merkel and French president Francois Hollande at a Brexit summit in Berlin on Monday. “There has to be a suspension of the bail-in rules and state aid rules at the highest political level in the EU, otherwise I don’t see how this can work,” said Mr Codogno.
“Brexit has nothing to do with it: instead, as everyone knows by now, Italy’s banks are beset with €360 billion (and rising) in bad loans, some 18% of total bank balance sheets, chronically poor profitability amid record-low interest rates, thin capital buffers and high costs.”
never waste a crisis..
“It is the weakest link in the European chain,” said Lorenzo Codogno, former director-general of the Italian treasury and now at LC Macro Advisors.”
weaker than greece?